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Israel to Tax Earnings from International Money Transfers

Nov. 7 — A multinational company based in a jurisdiction that has no tax treaty with Israel
must pay Israeli taxes on its Israel-related earnings from international money transfer
services, the Israel Tax Authority determined.

The ruling is set to apply to the growing number of financial service firms entering
the Israeli market, if they are located in a country not covered by a tax treaty with
Israel, a senior Tax Authority official told Bloomberg BNA Nov. 3.

Israeli practitioners said the small number of developed countries without such treaties
and other formulas available under transfer pricing regulations will greatly limit
its use.

More worrisome, they said, is the Tax Authority’s growing appetite for taxes from
international transactions by foreign businesses.

Step Too Far?

“This ruling addresses a very specific case, so its impact will be limited. But it
goes a step too far and, in doing so, deviates from international norms,”
Harel Perlmutter, head of the tax department at Tel Aviv-based Barnea &
Co. Law Offices, told Bloomberg BNA in a Nov. 6 telephone interview.

The Tax Authority decision was issued Oct. 26 in response to the first request for
a pre-tax ruling by an unnamed international company engaged in international shipping,
logistical, storage and money transfer services.

Until now, such services have only been provided by Israeli companies, whose earnings
are subject to a 25 percent withholding tax applied through Israel’s banks.

“In light of the fact that the company derives income from international money transfer
services, through an Israeli company and end-points located in Israel, and from Israeli
customers, the company should be seen as deriving income in Israel,” the ruling said.

The rate of tax will be derived from the company’s “net profit in Israel”
calculated as the difference between the company’s income and expenses related to
money transfer services in and out of Israel, or for Israelis, it added.

In line with the ruling, an international company will also be required to submit
a tax report annually, noting its Israel-related profits in full. The tax may be implemented
through withholding taxes on commissions collected from Israeli customers or through
advance payments set by tax assessors.

The decision doesn’t affect the international clearing company through which the service
company works to transfer funds or the Israeli affiliates that sell its services.
Rather, it will apply to the service company’s share of commissions stemming from
the international transfers.

The new ruling is an improvement, the Tax Authority official said.

“This decision determines the mechanism according to which taxes on such companies’
Israel-related earnings will be assessed, adding clarity and financial certainty,”
he said, noting that the formula will also allow companies to adjust their tax liability
according to changing profits and expenses.

Excessive Step, Limited Scope

Still, Perlmutter called the step “overly aggressive.”

Even though “it will not be widely applicable, it’s strange,” he said, calling transfer
pricing “the correct model for taxing activity between related companies.” Instead,
he said, “this ruling adds another tax category to assess foreign companies on their
Israel-related earnings.”

Ayal Shenhav, managing partner of Tel Aviv-based Shenhav & Co. Advocates & Notary,
said in a Nov. 6 telephone interview that he doubted the new formula would be widely
used, even by financial companies in similar situations. “The new formula is very
ambiguous and hard to implement. Deciding which costs to attribute to Israeli services,
from among a company’s overall activity, is complicated,” he said.

Shenhav expects that other companies—for whom the decision isn’t binding—will accept
the tax liability, but will prefer to calculate the rates under existing transfer
pricing rules, and mainly on a cost-plus basis.

The ruling could affect “more than a few” financial service companies—such as foreign
exchange, payment clearing and insurance intermediaries, Shenhav said, adding that
they just “won’t jump to use the new formula.”

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